Trading options on crude oil futures

We're often asked to explain what determines the price of crude oil as well as bunker fuel, diesel fuel, gasoil, gasoline and jet fuel options.

This post will be the first in a series on how the pricing of crude oil options. In return for the right to buy or sell crude oil or it's financial equivalent without the obligation, options buyers pay and options sellers receive an upfront premium, very similar to how you pay a premium for an insurance policy.

The variable which has the most influence on the price of an option is the relationship between the price of the underlying crude oil futures or swap and the strike price of the option. Depending upon the price of the underlying swap relative to a given strike price, an option is said to be at-the-money, in-the-money, or out-of-the-money.

NYMEX Crude Oil Future and Option Trading Market

An option is at-the-money when the strike price equals or is very close to the price of the underlying futures or swap. An option is considered in-the-money when the price of the underlying future or swap is above the strike price of a call option or when the price of the underlying swap is below the strike price of a put option.

Lastly, an option is considered out-of-the-money when the price of the underlying future or swap is below the strike price of a call option or when the price of the underlying futures or swap is below the strike price of a put option.

Futures & Options Trading for Risk Management - CME Group

The amount by which an option is in-the-money, is called intrinsic value. This intrinsic value, when combined with the time value of the option, are what determine the total value of the option.

Alternatively, if an option is out-of-the-money, it has zero intrinsic value. As such, the price of an out-of-the-money option consists solely of the option's time value.

This post is the first in a series on crude oil options. The subsequent posts can be found via the following links: A Beginners Guide to Crude Oil Options Part II - Time Value. A Beginner's Guide to Crude Oil Options - Part III - Volatility.

How To Buy Oil Options | Investopedia

A Beginner's Guide to Crude Oil Options - Part IV - Interest Rates. The Mercatus Energy Pipeline covers all aspects of energy hedging, trading and risk management.

Join thousands of others and subscribe now! The Mercatus Energy Pipeline. A Beginner's Guide to Crude Oil Options - Part I - Strike Price Posted on Sat, May 11, The four major variables that determine the price of crude oil options are: In our next post we'll explain how time value influences the value of crude oil options.

How to Speculate in the Energy Markets: Crude Oil Traders have Options | seboxinero.web.fc2.com

A Beginners Guide to Crude Oil Options Part II - Time Value A Beginner's Guide to Crude Oil Options - Part III - Volatility A Beginner's Guide to Crude Oil Options - Part IV - Interest Rates.

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